When is a tax break really just government spending? When it’s a “refundable tax credit.”
There’s plenty of debate on the Right over how to describe targeted tax deductions (I call many of them “subsidies,” and other conservatives object). Tax credits make a larger group of conservatives wary. Whereas a tax deduction limits your taxable income, a tax creditis more like the government returning your taxes to you.
But some tax breaks go further: Refundabletax credits allow you to get back your taxes, and then more.
For instance, say your state gives you a tax credit worth the entire cost of sending your kids to ballet class. Say ballet class cost $1,000. Say your state tax liability was only $800. If the ballet-credit were “refundable,” you’d end up owing zero dollars in state taxes, and then you’d get a $200 check.
So, a refundable tax credit is basically a direct government subsidy.
That’s why Louisiana Gov. Bobby Jindal has decided to target these tax credits in his efforts to fix Louisiana’s budget, which is reeling from falling gas prices and some general fiscal abandon in recent years. Jindal has found a dozen refundable tax credits he’d like to pare back, and he’s listed them in his budget rolled out today. They’re mostly business tax credits, and he’s not trying to abolish the credits — he’s just making them no longer refundable. This would save the state $526 million, according to Jindal’s budget, released today.
The biggest chunk is the state tax credit that pays businesses back for the local “inventory taxes” they pay. Because this is refundable, businesses can get a check from the state government that’s bigger than their state tax liability (if their local inventory tax liability is higher). Other refundable credits in Jindal’s crosshairs include wind and solar tax credits, and special credits for the sugar and film industry.
Of course, these industry-specific tax credits shouldn’t exist at all, refundable or not. Axing a credit altogether, however, invites charges of hiking taxes. Jindal’s taking the obvious first step of getting rid of some of the “tax cuts” that are really spending.
